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8% Growth: Not Before Structural Changes

The need for 8% economic growth is as great for Iran as the rift between it and attaining such growth, a study by the Presidential Office shows.

A country’s situation could not be more precarious. Iran’s economy has gone from trough to trough for the past five years—the consequence of wasting a decade of good fortune.

Recovery could not be harder. It is threatened by reduced global thirst and increasing supply for Iran’s main source of foreign exchange income, crude oil. The oversupply of oil has pushed the price of benchmark Brent Crude to almost a seven-year low and triggered the worst slump in the energy industry since the 2008 global financial crisis.

Brent has tumbled 36% this year. Not good news for a country with the fourth largest oil reserves in the world.

With its increasing population of educated young people, the Iranian economy needs 8% growth if it is to find enough jobs for them. Failure to employ them is not only a waste of great economic capital, but can also lead to social discontent.

The glum situation of the Iranian economy was recently highlighted by the president’s senior economic advisor, Maosud Nili. In a note, Nili cited 11 obstacles from having an outsized government to energy deficiency in industries, as Iran aims at sustainable growth and single digit inflation.

However, as many businessmen expect and economists have pointed out, the lifting of sanctions against Iran’s nuclear energy program will change Iran’s fortunes. Just how much depends on what the government does to open up the economy and how it overcomes the obstacles blocking its path to prosperity.

Investment is vital. Iran will need between $155 billion and $184 billion each year for the next five years—35% to 41% of GDP—to hit the 8% growth mark, the study found. Fair enough you might say. But if you consider that investment as a percentage of GDP averaged 27% from 1992 to 2011, you realize how far Iran is from this goal.

Even when crude was selling at historic highs and Iran enjoyed economic stability, investment was around a third of GDP. The study also draws a comparison with other nations, among which only China has been able to muster investments amounting to 39% of its GDP.

So where should Iran try to get the investment needed for its ambitious target? Most of the investment will be generated internally, but Iran needs $28 billion to $54 billion in Foreign Direct Investment annually. Yes, foreign financing and investment in rial-denominated securities don’t count. And here is a major catch. At its high point, Iran only attracted $4 billion in FDI.

However, historical performance is not an indicator of future possibilities in this case. Iran has been isolated for a long time and its government has traditionally raised eyebrows at foreign investments. Iranian business and labor laws have built walls to protect industries and the government-run nature of the Iranian economy has chocked competition and productivity.

The study reaches the conclusion market economists have been saying for years. Iran needs structural changes. Business laws must be rewritten. The state should take a supervisory stance toward the economy and allow the private sector to flourish. It must avoid populist policies that fuel corruption and instead increase its transparency and credibility. Only then, the $50 billion FDI tag will be a cakewalk for the rising economic powerhouse of the Middle East.